Zix Corp  (NASDAQ:ZIXI)

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Q1 2019 Earnings Call
May. 02, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. Welcome to Zix's First Quarter 2019 Earnings Conference Call. My name is Victor and I will be your operator this afternoon. Joining us for today's presentation are the Company's President and CEO, David Wagner; CFO, David Rockvam; and Vice President of Marketing, Geoff Bibby. Following their remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Relations section of the Company's website.

Now, I'd like to turn the call over to Geoff Bibby. Sir, please proceed.

Geoff Bibby -- Vice President of Marketing

Thank you, Victor. Good afternoon everyone and thank you for joining our first quarter 2019 call. With me today are Dave and Dave, our CEO and CFO. After the market closed, we issued a press release announcing our results for the first quarter ended March 31st, 2019, a copy of which is available on the Investor Relations section of our website at www.zixcorp.com. Please note that during the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the Company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It's important to note also that the Company undertakes no obligation to update such statements.

We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release and in this call. The risk factor section in the most recent Form 10-K and 10-Q filings with the SEC provides examples of those risks. During the call, we'll present both GAAP and non-GAAP financial measures. Non-GAAP financial measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results. We encourage you to consider all measures when analyzing the Company's performance. A reconciliation of certain GAAP to non-GAAP measures is included in today's press release, which can be found in the Investor Relations section of our site.

Now with that, I'd like to turn the call over to Dave Wagner for his opening remarks, Dave?

David Wagner -- President and Chief Executive Officer

Thanks, Geoff. Good afternoon and thank you everyone for joining us today. The first quarter of 2019 was positive in a number of meaningful ways. We closed the acquisition of AppRiver, successfully executed on the $8 million of cost savings, delivered 22% MRR growth at AppRiver, and delivered 74% new first-year orders growth at Zix. We topped off Q1 by winning the largest deal in the Company's history with a Top 5 US Bank. The last couple of quarters have been energizing and Q1 2019 represented a new high in terms of the progress achieved and momentum gained. Standalone Zix recorded 10% revenue growth to $18.4 million, making it our second consecutive quarter of double-digit topline growth. Standalone Zix also achieved record new first-year orders of $4 million driven by the one large deal and also by the continued strong performance of our channel partners, sales teams, and by our increasing attach rates.

The fact that Q1 2019 was the fourth quarter in a row with new first-year orders growth of more than 20% demonstrates the success of our high velocity sales model and the power of attach, all part of our strategy to align our business to the cloud and deliver a broader range of solutions for our customers. Standalone AppRiver is also seeing strong momentum in their business, which complements the strong Zix organic results. The integration of AppRiver has been moving at a rapid pace and the team is exceeding our expectations in terms of sales momentum, product deliveries, and integration. I'll get into this more in detail later on the call, but both teams have done an exceptional job collaborating with one another to drive this integration forward and achieve the best possible outcome for Zix AppRiver, our partners, customers, and of course our shareholders.

Perhaps most encouraging was the fact that the deal closed and costs saving program did not materially disrupt the positive momentum of the AppRiver MSP partners and the channel team who delivered more than 20% MRR growth year-over-year. The Q1 growth was driven primarily by the strong sell-through motion of Office 365 and also the team's continued success attaching email security. From a product delivery schedule, we integrated ZixEncrypt into the nautical (ph) platform in just 64 days from close and nearly 100 days ahead of schedule. We also launched the sale of Office 365 into the Zix go-to-market team on May 1st, slightly ahead of schedule. In short, it's been an incredibly busy and exciting time here at Zix. Our growth strategy of expanding our product suite in the cloud is accelerating our ability to cross sell and is increasing our attach rates. We are already seeing the benefits of operating at a larger scale and expanding our addressable market. Taken together, the successes of Q1 further support our commitment to our profitable growth strategy and our opportunity to deliver meaningful returns for our shareholders.

I look forward to sharing more details on our progress and outlook, but first I'd like to turn the call over to our CFO, Dave Rockvam, to provide more details on the financials for the quarter. Dave?

Dave Rockvam -- Vice President & Chief Financial Officer

Thank you, Dave, and good afternoon, everyone. Q1 was another strong quarter for Zix. We're pleased to once again generate revenue and adjusted EPS above our guidance demonstrating solid execution from our sales teams as well as the market's increasing adoption of our email security solutions. Zix stand-alone revenue and new first-year orders reached record highs, enabling us to achieve double-digit topline growth for the second quarter in a row. We also achieved record Zix stand-alone total orders of $22.4 million, which was up 52% year-over-year. As Dave mentioned, AppRiver had a very strong quarter on their own generating 21% organic ARR growth largely due to the significant traction the team has been having with Microsoft productivity solutions. All in all, Q1 2019 represented the successful execution of Zix and AppRiver's work toward our three to five year vision of significantly scaling the business and driving higher profitability.

Turning now to our financial numbers in more detail. Zix new first year orders for the quarter increased 74% to a record $4 million compared to $2.3 million in the same quarter last year. For the fourth quarter in a row, new first year orders growth exceeded 20%, which is a strong reflection of our robust selling motion. New first year orders has been a historical measurement for Zix, but was not a metric AppRiver was familiar with. Because of this and the fact that we are continuing to become more of a cloud SaaS provider, we'll focus more on annual recurring revenue growth going forward as the Company's key growth metric. Revenue for the first quarter increased 76% to $29.3 million from $16.7 million in the same quarter last year. With $29.3 million, we exceeded our revenue guidance for the quarter. On a Zix stand-alone basis, revenue increased 10% to a record $18.4 million.

Total overall organic growth across Zix and AppRiver was 14% during the quarter, which is at the high end of our implied growth guidance. We are very pleased with the momentum of both businesses and our ability to grow in the mid-teens in the quarter and you will see how that plays in -- plays its way through our increased 2019 full-year revenue guidance. Our adjusted gross profit for the quarter was $19 million or 64.8% of total revenue, which was an improvement on a dollar basis from $5.7 million or 79.8% of total revenue in the first quarter of 2018. Our adjusted gross margin for Q1 was down year-over-year. As a reminder, this was primarily due to AppRiver's third-party reseller products which carry lower margin than Zix's stand-alone business. With the early launch of Zix's encryption solution to AppRiver's more than 4,500 MSP partners and the early launch of the Microsoft productivity solution to Zix's sales teams, we're in a good position to maintain these margins within our long-term model range.

Our adjusted R&D expenses for the first quarter of 2019 were $3.5 million or 11.8% of total revenue compared to $2.8 million or 17% of total revenue in the first quarter of last year. The year-over-year dollar increase was primarily due to the inclusion of AppRiver. Partially offsetting this increase was the capitalization of software of about $1.2 million in Q1 associated with new features and functions added to our hosted platforms across both Zix and AppRiver. Our adjusted selling and marketing expenses for the quarter were $7.5 million or 25.5% of total revenue compared to $4.1 million or 24.7% of total revenue in Q1 of last year. The increase in selling and marketing expenses was due primarily to the inclusion of AppRiver. For the first quarter of 2019, our adjusted general and administrative expenses were $3.2 million or 10.8% of total revenue compared to $2.2 million or 13.3% of total revenue reported in Q1 of last year.

As a reminder, with the significant scale we are achieving with AppRiver, we anticipate adjusted operational expenses as a percentage of revenue to decline over the next couple of years in accordance with our long-term model. On a GAAP basis, we recorded a net loss of $6.3 million or $0.12 per fully diluted share compared to a profit of $1.9 million or $0.04 per fully diluted share in Q1 of last year. Our first quarter non-GAAP adjusted net income before deemed dividends excluding deferred tax was $3.8 million or $0.07 per fully diluted share. $0.07 per share exceeded our guidance for the quarter and represents a decrease of 12% from the $0.08 we reported in Q1 of last year. As we mentioned on our prior earnings calls, we expected the acquisition of AppRiver to be slightly dilutive on a year-over-year basis to non-GAAP adjusted earnings per share for the first quarter, but that we would expect the acquisition to be accretive to EPS starting in Q2 2019.

I would highlight that because we were in a GAAP loss position in Q1, we used only our basic share count, which did give us an extra $0.01 on our adjusted EPS. And finally, our adjusted EBITDA for Q1 2019 totaled $5.8 million compared to $4.8 million we reported in Q1 of last year. We are very pleased that in a quarter which we made such a transformational acquisition, we're able to deliver 20% growth in adjusted EBITDA. As a percentage of total revenue, adjusted EBITDA for Q1 2019 decreased to 19.8% from 29% we reported in Q1 of last year. We expect adjusted EBITDA margins to trend higher throughout the remainder of the year and finish at around 24% for Q4 2019. Per our long-term model, we anticipate adjusted EBITDA margins to gradually climb back toward the high 20%s range we have historically experienced specifically within the range of 27% to 30% we have outlined in our long-term model.

Cash flow from operations for the first quarter of 2019 was actually a cash usage of $417,000. At the end of Q1, we had $16.7 million in cash. Our total debt as of March 31st, 2019 was $175 million. Given our already strong cash flow generating ability, projected adjusted EBITDA growth, significant net loss carry forwards, and the step-up in valuation we received from the AppRiver asset; we believe we have ample room to pay down this debt potentially even before the loan matures in five years while still investing in the Company's growth. Our focus remains squarely on further enhancing shareholder value and executing on our long-term vision. CapEx and other intangibles for the quarter were $1.7 million, which consisted primarily of normal business capital purchases, internal software development projects, and capitalized software development. We expect CapEx and other intangibles to be between $6 million and $8 million for the full-year 2019.

We also continue to expect approximately $4 million of depreciation and amortization in 2019. Our backlog, which represents the dollar value of committed contracts, was $87.1 million, as of March 31st, 2019, which was up 23% from $70.8 million as of the same date last year. Zix stand-alone backlog was $76 million, a decrease -- an increase of 7% over last year. Given the move to more monthly contracts with Zix MSPs and the heavy monthly billing of AppRiver, we don't expect our backlog to increase as strongly as our overall growth rate and don't expect it to be a significant -- as significant an operating metric for the business as it has been in the past. At the end of the first quarter, our ARR, annual recurring revenue totaled $188 million, up 174% from Q1 of last year. Zix's stand-alone ARR increased 15% year-over-year to $78.3 million while AppRiver's stand-alone ARR increased 32% year-over-year to $109.7 million.

On a combined company basis, cloud-based ARR now makes up over 75% of total revenue -- total ARR. As I mentioned earlier, ARR will be one of our -- the key metrics we will focus on because ARR brings together many of our other key focus metrics; winning new customers, selling into our base, attaching new products, and retention. In the quarter, we had 104% net dollar retention. This represents our renewals plus our new sales into the installed base divided by the renewals that were available at the beginning of the quarter. This was impacted positively by the Top 5 bank. But even with that out, we still had a quarter over 103% net dollar retention. And for further transparency and to help investors further understand our business, we have added a new chart to our investor deck posted on the Investor Relations page of our website that breaks out ARR, total unique users, total licenses, and ARPU annual revenue per unit by major solutions categories; productivity, encryption, and advanced threat protection.

We also have another bucket where solutions will stay until they cross over 10% of total ARR. We feel this transparency will help investors better understand our business, our attach opportunity, and to build better models on the Company. Now, for our second quarter and full-year 2019 financial guidance, we currently anticipate revenue for the second quarter to range between $44.5 million and $45 million. We are also forecasting fully diluted GAAP earnings per share to be between a loss of $0.05 and a loss of $0.03 and fully diluted non-GAAP earnings per share to be between $0.11 and $0.12. The financial outlook includes the required GAAP adjustments on the deferred revenue acquired from AppRiver for purchase revenue accounting, which has a negative impact on our Q2 revenue of approximately $1.5 million. For the full-year 2019, we are increasing our revenue guidance range to be between $167 million and $169 million, which represents an increase of between 135% and 140% compared to revenue in fiscal 2018.

On a pro forma organic basis, this would be between 14% and 15% growth for the total Zix and AppRiver. Our revenue guidance includes the required GAAP adjustment on the deferred revenue acquired from AppRiver for purchase revenue accounting, which has a negative impact on our 2019 revenue guidance of over $4 million. Our fully diluted GAAP earnings per share guidance is expected to be between a loss of $0.26 and a loss of $0.20 and we are increasing our full -- fully diluted non-GAAP adjusted earnings per share to now be between $0.40 and $0.42 for fiscal 2019 further demonstrating the accretive nature of the acquisition. Our non-GAAP adjusted EBITDA guidance for 2019 is now $0.41 at the midpoint representing an increase of 24% compared to the $0.33 we reported in 2018. $0.03 to $0.04 of the increase in our guidance is from a change to our share count. Our guidance -- our prior guidance assumes that all True Wind 16.6 million preferred shares will be included in our share count.

Our current guidance assumes that we have a GAAP net loss in Q2, which means that we will just use our basic shares of 53.5 million in the denominator. In Q3 and Q4, we anticipate achieving GAAP net income and would use fully diluted share count of approximately 71.5 million shares in Q3 and 72 million shares in Q4. We also continue to expect revenue of approximately $47.5 million to $50 million, which is a slight increase in the bottom end of the range with an adjusted EBITDA margin of 24% in the fourth quarter of 2019. We are increasing our target ARR to approximately $202 million to $209 million at fiscal 2019 year-end representing a growth rate of approximately 12% to 16% year-over-year. As Dave mentioned earlier, we have completed all $8 million of our cost savings initiatives well ahead of the previously stated 12 to 18 months and we should see the full impact of those savings in the third quarter.

Wrapping up my remarks, we're encouraged that not only steered the Company towards more profitable growth and expanded product suite in a larger addressable market, but also have the opportunity to propel Zix to the next level of scale, growth, and profitability. The entire team has done an exceptional job these last few years to get us where we are today and we could not have asked for a better opportunity moving forward to create significantly more value for our employees, partners, customers, and shareholders. This completes my financial summary. For a more detailed analysis of our financial results, please refer to our Form 10-Q, which we plan to file by May 10th. Dave?

David Wagner -- President and Chief Executive Officer

Thanks for the financial overview, Dave. I'll now review our progress as an integrated company in the context of our three main growth drivers. I will then provide an update of where we are with the AppRiver integration before we open the call up for questions. As a reminder, our three growth drivers are new orders to new customers, sales to existing customers, and increase in retention. Our first growth driver is new orders to new customers. From a core Zix perspective, we continue to drive strong adoption of our solutions by new customers. Four of the Top 5 new customers purchased the bundle that includes advanced threat protection and email encryption while the other one was for stand-alone email encryption. Our largest new customer win for the quarter was in the government vertical for a state healthcare department. They were using a competitive legacy email security solution and end-to-end encryption was their primary requirement.

So, the breadth of our offerings and its ease of use drove their decision to move to Zix. This win will further solidify our already strong presence in healthcare in their state. From an AppRiver perspective, we look at new customers both in terms of adding new MSPs to our platform and also adding new end users to existing MSPs. Looking at some of the top new MSP wins in the quarter. We have three in the US; one moving from Microsoft direct, one moving from a distributor, and one just now transitioning to an MSP model. Two more large new MSP wins were in the UK where we are just getting started. In terms of total new end users, AppRiver added on a net basis, just over 1,600 additional productivity customers in the quarter with approximately 45,000 total new unique users, again net of churn. Now let's take a closer look at our second growth driver, which is sales to existing customers, 71% of core Zix new first year orders during the quarter came from our installed base.

This higher percentage was driven by the large bank deal, strong upsell, and attach. So, let me spend a moment on each. Our largest add-on during the quarter and the largest deal in Zix's history was with a Top 5 bank we mentioned earlier. This Top 5 bank signed a three-year deal for all of our encryption products; Gateway, ZixMail, and EMS. While all elements of our encryption offering are important to this customer, our ability to win the deal was driven by the fact that we have a very broad range of deployment options including both on premise and cloud delivery to support their hybrid environment and their long-term vision of moving to the cloud leveraging a hybrid model. So our on-premise capability which we bolstered with the acquisition of EMS in 2017, was crucial to this win. We were also favorably positioned to win the deal due to our deep commitment to maintaining a service that meets the highest standards of compliance including adherence to the Americans with Disabilities Act requirement.

As the leader in email encryption, we believe we devote more R&D resources to email encryption than any other vendor in the market. This large customer appreciates the importance of strong security standards, strong compliance, ease of use, and a vendor with a robust roadmap to meet their evolving needs over time. We are obviously excited about the strong enterprise endorsement of our core product suite and expect to be able to leverage these capabilities in future enterprise deals. The four remaining add-ons were in healthcare; two accounts added encryption only, one added encryption and threat protection, and one added archiving. Moving on now to our third growth driver, increasing retention. Standalone Zix retention for the quarter was at our 90% target. Looking at the net dollar retention, which includes add-ons, our net dollar retention was well over 100% and was still over 100% even if you exclude the Top 5 bank deal.

This is an important milestone for Zix as we continue to execute on our attach strategy. AppRiver net retention rate was over 95% in the quarter and AppRiver net dollar retention was also greater than 100%. With a broader range of services now available to our partners, we will be working to drive this rate even higher. It's a key metric as we drive our strategy and revenue synergies from the deal. I'll now spend some time talking about where we are with the integration of AppRiver before we open the call up for questions. As I stated previously, we are focusing on five guiding principles: integrating to become one company with one culture, channel enablement, brand integration, cross selling, and building a combined product roadmap. In terms of overall integration, we've made tremendous strides in integrating the two businesses without missing a beat or causing disruption in how we take care of our partners and customers.

Both teams are collaborating exceptionally well and delivering on key milestones, often times well ahead of schedule. We've already integrated our networks, phone systems, and collaboration platforms. We have functionally integrated most of the organization with the exception of the customer facing sales and support organizations, which we expect to run separately for the foreseeable future. Our culture and brand integration work is also on track and set to be complete on schedule in early Q3, but perhaps the most visible indicator of the strength and velocity of the integration was last week's launch of ZixEncrypt, which we completed in just 64 days. The fact that we were able to integrate ZixEncrypt so quickly into the AppRiver platform speaks to the close cultural alignment of the teams and also to the strength of our local leadership teams, which carefully managed a complex integration every step of the way.

This brings me to our second priority, which is enabling channel partners to aggressively pursue cross-sell opportunities. In this pursuit, both sales organizations continue to work in parallel and will continue to do so for the foreseeable future as there is very little overlap in the partner base. This is because the buying motion is so different between our customers who prefer to purchase the solutions recommended by their managed service provider and those who take more control of the IT procurement process. We're encouraged by the introduction of ZixEncrypt to AppRiver's partners. We had trials start within hours of availability. We're also excited about the archiving opportunity. ZixArchive is now scheduled to be integrated in June, almost 60 days ahead of plan. On the Zix side, Office 365 was just introduced to the Zix sales channel beginning on May 1st.

Secure hosted exchange is technically tied to the AppRiver email security solution so we will be offering it for sale to the Zix channel in a more controlled limited fashion until we keep -- complete the roadmap integration for email security. From a channel perspective, virtually all of the partners I've met and spoken with over the past couple of months have enthusiastically welcomed the combination of Zix and AppRiver. Email security is top of mind for most SMBs and for MSP partners. Our research shows that 74% of small business leaders have cyber security top of mind every day. They perceive the risk of a cyber-attack to be greater than the risk of fire, flood, and theft combined. So, the ability to partner with one vendor, ZixAppRiver, for Microsoft productivity products and best of breed email security for compliance is a big win for them. They're also excited about the improved economics when they cross sell advanced email security, ZixEncrypt and ZixArchive, to the customers.

With ZixAppRiver, they have the opportunity to deliver superior protection to the customers, become stickier with their client base, and drive higher profitability in the business. All ingredients we believe are key to a successful business relationship. And finally, we will be focused on building an integrated product road map that captures the best of both Zix and AppRiver to drive the most value for our partners and customers. The accelerated integration of ZixEncrypt and ZixArchive demonstrates how well we're doing on technical integration. As we finalize these accelerated deliveries, we will continue to work deliberately with intentional agility on the longer-term integrated product roadmap. We are excited about the opportunity of bringing the best of our two email security solutions together into one even more powerful solution and the opportunities to further expand the power of our platforms as we bring them together over time.

In closing, Q1 was another important benchmark quarter for Zix. We achieved record stand-alone results, delivered double-digit organic growth, and made rapid progress on the integration of Zix and AppRiver. As one team, we significantly enhanced our go-to-market capability and our ability to more aggressively cross sell across the base of more than 80,000 customers. Execution of our strategy has positioned us to benefit from the rapid migration to the cloud and the associated increasing use of outsourced IT providers. It's the opportune time for Zix to ascend to the next level and become one of the leading cloud-based email security and productivity providers. We're excited about the challenge and opportunity ahead and we are working tirelessly to make that vision a reality.

Now with that, we're ready to open the call for your questions. Victor?

Questions and Answers:

Operator

Yes, sir. (Operator Instructions) And our first question comes from the line of Mike Malouf from Craig-Hallum. You may begin.

Mike Malouf -- Craig-Hallum Capital -- Analyst

Great. Thanks for taking my questions and congrats on the integration so far. Looks like it's gone much smoother than one would have thought.

David Wagner -- President and Chief Executive Officer

Thanks, Mike.

Mike Malouf -- Craig-Hallum Capital -- Analyst

I'm wondering if maybe we could just explore a little bit more on the Office 365 opportunity as you start selling it into the Zix space. Can you talk a little bit about that and how you go about approaching that with your customers?

David Wagner -- President and Chief Executive Officer

So, our focus is going to be first on our smaller customer base, the customers that we have with mailboxes -- less than 250 mailboxes per customer, that's going to be our focus. I think our first and best opportunity is what we call the dark to cloud migration so customers who have not yet taken advantage of the ability to move to Office 365, testing our base of those customers and their appetite to move to the cloud at this time. And we also believe there's a large set of customers, especially the smaller customers, that are using a vendor that doesn't have the same kind of phenomenal care that AppRiver is known for and we'll be making sure our customer base knows that we're here with outstanding support at a price that's very, very similar to what they're probably getting directly from Microsoft but through another partner as a great option to consolidate their service. So, we're looking forward to that opportunity. It just went into the market, as I said, yesterday so that's something that we'll have more data on I would expect when we get to our Q2 earnings call in July.

Mike Malouf -- Craig-Hallum Capital -- Analyst

Can you give us a sense of how much of your guidance into the back half is predicated on success of that?

David Wagner -- President and Chief Executive Officer

So when we built the guidance range, at the lower end of the range we were focusing on the stand-alone momentum that was in the two businesses, which of course the results last quarter were very much at the high end of that. And then the top end of the range is where we'd expect to see the success of cross sell coming through, both ZixEncrypt and ZixArchive into the AppRiver partner customer base and Office 365 into the Zix base. And I think you're automized in terms of the average revenue per unit of the office productivity suite. It's a high price per unit so in terms of the topline expansion, that would be -- if we're more successful, that's where the topline would come from.

Mike Malouf -- Craig-Hallum Capital -- Analyst

Okay, great and then just one more question. When we think about gross margins, can you remind me -- maybe this is a good one for David too. Can you remind us where you think gross margins for AppRiver can trend and what will be the impact on gross margins after it starts bundling in sort of the Zix products? Obviously we have Encrypt, but we have threat coming down the line and just try to give us a sense of the impact on the gross profit margins for that? Thanks.

Dave Rockvam -- Vice President & Chief Financial Officer

Yes. Good question, Mike. It's Dave Rockvam. Looking at that -- our core products on the offerings that Zix had before, we ran this 80% gross margin level. If you look across AppRiver's advanced threat protection and their other offerings that were proprietary, they were running in that same 80% range. So, we put a new chart in the deck and it's not highlighted in there; but when you take a look at that, you'll see encryption, advanced threat protection, and then our other category which in mostly proprietary. Those businesses can run in that 80% gross margin range, productivity is running in the high 30% gross margin range. So blended together, we -- that's where we get the 60% to 65% target range. So, hopefully that gives you some color there.

Mike Malouf -- Craig-Hallum Capital -- Analyst

Okay, great. Thanks a lot. Appreciate it.

Dave Rockvam -- Vice President & Chief Financial Officer

Thanks, Mike.

Operator

Thank you. And our next question comes from the line of Catharine Trebnick from Dougherty & Company. You may begin.

Catharine Trebnick -- Dougherty & Company -- Analyst

Yes. Thanks for taking the question. Can you just quickly review where -- you had given two things and I have been juggling three phone calls tonight. I apologize for you to repeat, but I was trying to get early on what you said the Zix between AppRiver organic growth was. I think you gave that at the beginning and I jumped off quickly and joined again, Sorry.

Dave Rockvam -- Vice President & Chief Financial Officer

Right. On the ARR perspective, the ARR growth for Zix was 15% and the growth for AppRiver was 21%. Those are pure organic numbers taking out any acquisitions either company had.

Catharine Trebnick -- Dougherty & Company -- Analyst

All right, thank you. And then you had mentioned -- now Zix has primarily been domestic and you're now reaching into the UK through your relationship with AppRiver, is that correct?

David Wagner -- President and Chief Executive Officer

That's right and that's something we're really excited about. The AppRiver platform for servicing MSPs we think is a really good model to distribute cloud-based security products in Europe. And so AppRiver had recently hired a Director of Sales for Europe based in the UK and he and his team are just getting started in that market, but already two of the five larger MSP -- new MSP wins in the quarter showed up in the UK. So we're early, early days there, but we're excited about the opportunity and the success the small team had in Q1.

Catharine Trebnick -- Dougherty & Company -- Analyst

Okay. And then the other question is would you say you're -- if you look at the prior data at AppRiver, they have a pretty old email encrypt system and it looks like you guys have been pretty aggressive in getting yours into AppRiver. What would you say the average seat size this quarter was for your email products?

David Wagner -- President and Chief Executive Officer

So, it was that 29 given the data I shared with the 1,600 unique new productivity customers with the 45,000 net of churn so it was 28 users per customer was the average new customer size at AppRiver and that's really tightly aligned with the life to date average seat count as well.

Catharine Trebnick -- Dougherty & Company -- Analyst

Okay. Thank you.

Dave Rockvam -- Vice President & Chief Financial Officer

Thanks.

Operator

(Operator Instructions) And our next question comes from the line of Tim Klasell from Northland Capital. You may begin.

Tim Klasell -- Northland Capital -- Analyst

Just a few questions here, first, congratulation on the $8 million in synergies way ahead of schedule, but that sort of begs the question, is there maybe a little bit further to go there and maybe what could -- what should we be thinking there?

David Wagner -- President and Chief Executive Officer

No. It was really important to us to get that taken care of as soon as possible. So we are really pleased that the leadership team at AppRiver working collaboratively with Zix, we were able to get all of those cost savings out of the way. So with everything going forward, as Dave was saying, will be synergies created by volume is what we're really anticipating is to continue growing in the mid-teens organic rates and becoming a little bit more efficient, a little bit more effective with each stage of scale of growth is what we're expecting to happen.

Tim Klasell -- Northland Capital -- Analyst

Okay, great. That's very helpful and then jumping over to the sales force. Now obviously, AppRiver is now going to have sort of the Zix encryption product and that's also ahead of schedule, but how are you incenting the sales force? What is going to be the channel to promote that product and what should we be seeing when we speak to industry sources about what you're doing with getting Zix product into the AppRiver customer base?

David Wagner -- President and Chief Executive Officer

Yes, so into the AppRiver -- ZixEncrypt and ZixArchive ultimately into the AppRiver partner and customer base, the proposition is really several fold, but first, it's the best of breed encryption and archiving solution for compliance that is really at the very, very top of the competitive offerings in the market. So, the MSPs are going to be able take advantage of that. The second thing they're going to take advantage of is the fact that as 100% organic IP, we're able to give them the kinds of margins that are normal in the resale of organic IP and that's a lot higher than what they're getting on the Microsoft offering. So, what we are focused on is the gross margin per customer per user per mailbox and the incentive for the partners as they move up from their golds or platinum would be driving that blended mix and similarly with the sales team, we're introducing incentives that align with that same thinking, which is what's the gross margin ARR that they're delivering from the -- either through the channel partner or at the end user level.

Tim Klasell -- Northland Capital -- Analyst

Okay, great. And then let’s reverse that question around (ph) Office 365 into the Zix sales force. How does that -- how are you going to incent them? How are you going to roll that into...

David Wagner -- President and Chief Executive Officer

The real incentive there is -- Microsoft is a great solution, everybody knows it. The Zix's solutions complement it extremely well and it's a really natural alignment to buy your email security with the same vendor, one phone call with phenomenal support. So, that's the first is the value that they're going to get by combining with one vendor their solution set and that's really the -- and then the better support that comes with AppRiver and we talked a lot about this earlier, but the net promoter scores run in the 70s and as high as 80 for AppRiver, it's really phenomenal care and that matters a lot to businesses and then on the channel margins, they'll be adjusted for the fact that we don't make as much margin on Microsoft. So the retirement of quota will be lower on the Microsoft products, but the ARPU is so much higher that the dollars that the partner and sales person supporting that partner get from a sale is really that margin dollar that's going to drive them to really want to make sure they're having that conversation of whether it makes sense to align their purchase of the productivity suite with the security products of one vendor.

Tim Klasell -- Northland Capital -- Analyst

Great. Thank you. That's been very helpful.

Dave Rockvam -- Vice President & Chief Financial Officer

Thank you, Tim.

Operator

Thank you. And at this time, this concludes our question-and-answer session. I'd like to turn the call back over to Mr. Wagner for his closing remarks.

David Wagner -- President and Chief Executive Officer

I just thank you everybody for your time and attention this afternoon and we look forward to updating you further on our progress on our Q2 earnings call in late July.

Operator

Thank you for joining us today on Zix's first quarter 2019 earnings call. You may now disconnect. Everyone, have a great day.

Duration: 43 minutes

Call participants:

Geoff Bibby -- Vice President of Marketing

David Wagner -- President and Chief Executive Officer

Dave Rockvam -- Vice President & Chief Financial Officer

Mike Malouf -- Craig-Hallum Capital -- Analyst

Catharine Trebnick -- Dougherty & Company -- Analyst

Tim Klasell -- Northland Capital -- Analyst

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